WASHINGTON – The risk that skidding U.S. stock prices will pinch spending means Federal Reserve policymakers must be ready to cut interest rates if necessary, the International Monetary Fund said on Wednesday.
In its latest World Economic Outlook, the Washington-based lender scaled back its previous estimates for U.S. economic growth in 2002 and 2003 and said prospects depended heavily upon whether demand holds up.
"In view of the heightened uncertainties surrounding the outlook, the Federal Reserve has room to wait to withdraw stimulus until the recovery is more clearly established, and if the incoming data were to weaken further, additional interest rate cuts would need to be considered," the IMF said.
The U.S. central bank's policysetting Federal Open Market Committee met on Tuesday and, by a split vote of 10-2, decided to keep its trendsetting federal funds rate at a four-decade low 1.75 percent.
Two dissenters argued unsuccessfully for lower rates -- a sign of unease within the Fed's policy group that a spotty U.S. recovery needs help to stay on track.
The IMF predicted the U.S. economy would expand a relatively tepid 2.2 percent this year and 2.6 percent in 2003 -- down from estimates of 2.3 percent and 3.4 percent the IMF made in April.
Its bleaker prognosis for U.S. performance fits with the IMF's broader assessment that global growth was not recovering as well as anticipated and that odds were the situation would worsen rather than improve.
But in the case of the United States, the IMF stressed the potential adverse impact from large, continuing losses in stock prices that have carried leading indices like the Dow Jones Industrial Average to four-year lows and subtracted trillions of dollars from investors' wealth.
"Clearly, the recent sharp decline in equity markets will have a significant impact on demand looking forward, particularly in 2003, although this will be partly offset by the recent fall in long-run interest rates and the depreciation of the dollar," the IMF said.
In addition, the IMF warns the U.S. is vulnerable because of "the possibility of an abrupt and disruptive adjustment in the U.S. dollar (that) remains a concern, for both the United States and the rest of the world."
It repeats a long-standing IMF concern that the United States is running a dangerously high current account deficit because its trade deficit with the rest of world is so high and it is so dependent upon inflows of capital from abroad to finance it. That increases U.S. vulnerability to a sharp dollar decline if a global economic slowdown causes foreigners to invest less in the United States.
"The question is not whether the U.S. deficit will be sustained at present levels forever -- it will not -- but more when and how the eventual adjustment takes place," the IMF said.
The Bush administration strongly rejects the IMF's contention that the current account deficit is troubling. On Tuesday, Treasury Secretary Paul O'Neill said it simply reflected the brisk level of business activity in the United States relative to other parts of the world.
"I'm not too worried." O'Neill said in response to questions during a trip to Tennessee, acknowledging there was "lots of clamor" from some quarters about its potential risk.